FORENSIC tpaace January 2003 Anatomy of w businesy Information on the financial affairs of a business is important in many types of legal action. Such situations include loss of earnings or loss of profits claims, and cases in which valuations are necessary, for example shareholder disputes and matrimonial settlements. Consideration of a business’s turnover and profits is often important in fraud cases and confiscation proceedings. Documents containing financial information The table below categorises some of the main documents containing financial information according to their potential relevance to a business’s turnover, profitability and financial position. Documents primarily relevant to: Turnover Profitability Financial position Detailed profit and loss account v v Balance sheet v Cash flow statement v v Register of charges v ‘Management accounts v v v Budgets, forecasts and business plans v v ¥ Minutes of board/partners’ meetings v v v ‘Working papers of accountants/auditors v v v Order books. v Sales invoices v Details of bank facilities v Bank statements v v Income/corporation tax returns v v v VAT returns v v Correspondence with Inland Revenue v v v Returns to regulators (if applicable) v v v Credit status reports v Correspondence with banks v v v SIM KAPILA Chartered Accountants aAs the table shows, the information which is potentially available extends far beyond the profit and Joss account and balance sheet. Financial statements can often disclose a great deal of information, but a much more complete view of a business can be obtained if it is possible to gain access to information generated for internal or other purposes. Some types of information may be relevant to a business’s financial position as well as to its tumover and/or profitability. For example, a review of a business’s balance sheet may indicate that its fixed assets have been largely written off: although the business's profits in the short term are enhanced by low depreciation charges, its financial position and profitability will be affected in the future by the need to fund replacement assets. Purpose of review ‘The information to be reviewed depends on the purpose for which it is required. Ifa business is to be valued, for example, particular attention needs to be paid to budgets and forecasts, management accounts, sales data and order books to establish the level of future maintainable earnings on which the valuation is likely to be based. By contrast, a review of a business’s financial position to establish the level of funds which can be made available as part of a divorce settlement focuses on such matters as the level of bank facilities. Consistency of information Information from one source can act as a check on that from other sources. Discrepancies between fone set of documents and another may reveal a deteriorating financial position and/or poor management: for example, increased debtors in a period of static sales may indicate worsening credit control, Inconsistencies may also indicate mis-statements in the recording of information. Conclusions The volume of information to be examined depends primarily upon the size of the business, on time and cost constraints and on the extent to which appropriate documents have been made available. It is important, therefore, to concentrate attention on the most relevant information to achieve a focused and cost-effective review. To obtain further details of our activities or to benefit from the firm's experience and expertise, please contact George Sim or Rakesh Kapila. Please note that this newsletter has been writen for the general interes of readers and is intended for guidance only. Its therefore ‘essential to take specifi professional advice before taking any action. FSS CEB] SIM KAPILA Chartered Accountants 15 Bemers Street London WIT 3LL Telephone 020 7636 7699 Facsimile 020 7636 7717 E-mail mail@simkapila.co.uk